Part one: Why a family goes to school
Lausanne, Switzerland (GenevaLunch) - Last Friday 37 family business students at IMD in Lausanne, one of Europe's top business schools, packed up and headed home with new ideas about moving the family company into the future. The group was the latest to follow a week-long programme for "global leading family businesses," according to IMD-Lombard Odier Darier Hentsch Family Business Research Center co-director Joachim Schwass.
In an era of giant multinationals and publicly-owned companies family businesses may seem like an anachronism, but nothing is further from the truth, argues Schwass. The public corporation as we know it goes back to the early 1900s, he says. At that time two Harvard professors wrote about the need to separate ownership from management.
These new public companies powered business through the 20th century but in the last 5-10 years we have been seeing constraints on the corporate system, he believes, with demands for limits on huge salaries and boards being called to greater accountability. UBS, for example, today announced the immediate implementation of new governance rules that draw a clear line between its executive board and its management.
"Families don't need this heavy board structure. You trust yourself, you know what risks to take and you get to know your business over time. And your thinking is very long term, the next generation and beyond - you want to give back and you have a knowledge base. So we're really coming back to the roots of our capitalist system. The rewards are higher for everyone. Family businessses are taking back the role that governments are finding increasingly difficult to manage.
"The problem is that family businesses bring the family and the business together and if they think ahead, plan ahead, their system can work, but it doesn't happen automatically."
Age 50 is a critical time for many company founders, Schwass points out, the moment when the owner starts to see the next generation as just power-driven, and that can cause problems. "The first generation needs to be able to say, 'here is a platform and it's your choice' and then motivate them." Schwass laughs at a common scenario, where for years a parent "comes home every night and complains about the unions or this and that, someone stealing business - and then they turn to the children and say, 'and some day this will all be yours!' Too many conversations are badly handled."
The lessons learned by families who turn to IMD for help apply equally well to most family businesses, he says. For a start, such firms tend to follow a predictable development pattern. Typically, one person founds the company and he or she remains the indispensable "I" at the centre. The second generation is often the children, siblings: a small family that functions as a team, marked by a need for equality. By the third generation, the family has grown to include cousins, and an "Us and them" attitude has developed, where inequality becomes part of the company's operating system.
"You've got built-in conflicts and about 80% of family companies fail" when the founder passes on the company, says Schwass. "In the second generation, the team is characterized as very close" but by the third generation, with cousins, differences stand out. This is hard for families to deal with because "in an 'Us' culture you're punished if you're different but in 'Us and them' it's good to be different. A company by this stage needs that wider pool of more diversified talent and personalities. Another 10% of companies fail at this point, says Schwass. "Once the cousins are brought in you have to have governance." IMD tries to help them make what Schwass calls a paradign shift. "Where a family sees names and history, we see structures, strategy."
Schwass himself is part of a family business so his input is based on
both academic work and personal experience. "Globalization and the
Internet have done a lot to every company. I was doing business in
Australia, China and elsewhere and I constantly travelled. I always had to go to them, but now
clients are brought to us." This impact of a changing world, coupled
with new research, might make it seem that family businesses are facing
new challenges, but Schwass says this is not at the root of problems.
"Underneath,
fundamentally, the needs of family-owned businesses have not changed
because they are based on human issues, values and behaviour. The
problems arise because you are directly involved, either as an owner,
or family member or manager."
IMD starts by helping its family business students understand why they need to avoid building their companies around an individual. At the outset it may be normal for the company's capital to be primarily the person who founded it, so a "revolution" is needed to make that one person-centred approach "redundant." The business needs to shift, using "evolution" to create a system that will replace the individual, at the same time making a strong commitment to solid growth. A new programme focuses on helping families make the generational transition.
The 20-year-old Family Business Center uses its research base and
case studies to help companies understand this. Schwass says the
research is far richer than it was even 5-10 years ago, and it is
increasingly international.
IMD worked closely, for example, with an Indian company, the Murugappa Group based in Chennai, India, which rethought its structure. "If you look at the Indian family-owned business model there might be six sons, so the founder sets up six businesses." Trust and equality are important in Indian society and this structure reflects it, he believes. But typically, once the founder is gone the companies, previously closely linked, start splitting up. In Mulogappa's case, the family's success has led to it winning one of IMD's family business awards.
